The Ted Spread

Ted is the Chief Market Strategist and Vice President in charge of the Zaner Ag Hedge Group and specializes in agricultural hedging employing various strategies using futures, futures spreads, outright options and option combinations. He believes it is paramount to be able to use different strategies to adapt to market conditions. Ted works with large to mid size grain and livestock producers and end users in North, Central and South America.

What I Expect from the USDA

Jan 10, 2013

TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT BE SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES.

In a word - chaos. This will be the first time we have had live trading while a January report has come out. This is important because January USDA reports have a reputation for being big market movers. In 5 of the last 6 years the January report has sparked a limit move one way or the other. There are so many moving parts to this report that back in the old days before we traded through reports it would take me a good 45 minutes to go through all the numbers and fully digest it. Tomorrow will very likely be the case of many overreactions to individual numbers as we pull them off the news wires. I for one strongly urge the CME Group to reconsider markets being open during the release of a report for the safety of market participants. The problem here lies in these overreactions to individual numbers making it almost imposable to use a stop going into a report that is almost certainly going to more the market in a big way. Option prices sure reflect that as well with even the February options that only have 2 1/2 weeks to go still holding a bloated volatility premium. Maybe tomorrow will help convince the CME Group to rethink this arrangement. Now, on to the meat and potatoes of the thing.

For wheat and soybeans I think there is some potential for bullish numbers for the US figures, however for both wheat and soybeans the world numbers should carry the most weight as our exports have been (or shortly will be in the case of soybeans) largely priced out of the global market. There are certainly issues with wheat but the world stocks are still ample and demand is slow making it hard to justify higher prices despite poor harvest results in South America, weather issues in North America and talk of export bans in many countries. Soybeans have had good export sales in recent months and if this kept up we would run out but the world is about to be flooded by a monster South American soybean crop. Our exports could very well fall to near 0 once Brazil has product at port.

Corn is the most interesting number for me tomorrow. The US is the major corn exporter of the world and our stocks determine world stocks and therefore world prices. There are a lot of moving parts to this corn report tomorrow. On the demand side we will be looking for adjustments in exports and maybe ethanol and feed as well. It seems to be a given that export demand needs to be cut dramatically after months of dismal sales. Last month the USDA chose to take a bit of a wait and see stance on exports, well we have waited and we certainly see that nobody is buying at current price levels. Ethanol may also be on the chopping block as well with our weekly "corn for ethanol" numbers are falling 1-1.5 million bushels below the average needed to hit the current USDA estimate. At some point this could translate in a 50-75 million bushel cut in demand as well, however the USDA may want to wait some more on that. Feed demand could also be adjusted lower at some point with cattle on feed numbers consistently showing the lowest cattle on feed since 1996.

So, it would seem likely that the USDA is going to make some reductions on the demand side of the equation tomorrow. What is a little harder to predict is the production side of the equation. The USDA could be making changes on planted acreage, harvested acreage, and yield or maybe all three. Talk around town is that harvested acreage numbers need to come down. Private estimates still have higher planted acreage numbers then the USDA. And logically the yield number should have to change if either planted acres or harvested acres changes because if you are taking out harvested acres you are taking out the worst of the worst and this should boost average yield.

My thoughts on the production side are this - I think the USDA raises planted acreage, lowers harvested acres by the same amount as the increase in planted acres there by offsetting any change in acreage, and finally raises the national yield slightly having cut out the worst of the worst. If this were to happen it would mean a higher production number on a lower demand number (as discussed above) and therefore an increase, maybe a sharp increase in carryover. If this scenario plays out the corn ending stocks figure could be closer to 1 billion bushels which to me would justify a test of $6.00 - $5.70 old crop corn. But, we shall see what the USDA has to say tomorrow.

Good luck tomorrow, and please use extra caution in the first few minutes after the report.

All this means that speculators should be looking for opportunities and producers need to look to lock up some prices while we have corn near $7.00 and soybeans near $14.00. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.

In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!

Futures, options and forex trading is speculative in nature and involves substantial risk of loss. This commentary should be conveyed as a solicitation for entry into derivitives transactions. All known news and events have already been factored into the price of the underlying commodities discussed. The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.

FOR CUSTOMERS TRADING OPTIONS, THESE FUTURES CHARTS ARE PRESENTED FOR INFORMATIONAL PURPOSES ONLY. THEY ARE INTENDED TO SHOW HOW INVESTING IN OPTIONS CAN DEPEND ON THE UNDERLYING FUTURES PRICES; SPECIFICALLY, WHETHER OR NOT AN OPTION PURCHASER IS BUYING AN IN-THE-MONEY, AT-THE-MONEY, OR OUT-OF-THE-MONEY OPTION. FURTHERMORE, THE PURCHASER WILL BE ABLE TO DETERMINE WHETHER OR NOT TO EXERCISE HIS RIGHT ON AN OPTION DEPENDING ON HOW THE OPTION'S STRIKE PRICE COMPARES TO THE UNDERLYING FUTURE'S PRICE. THE FUTURES CHARTS ARE NOT INTENDED TO IMPLY THAT OPTION PRICES MOVE IN TANDEM WITH FUTURES PRICES. IN FACT, OPTION PRICES MAY ONLY MOVE A FRACTION OF THE PRICE MOVE IN THE UNDERLYING FUTURES. IN SOME CASES, THE OPTION MAY NOT MOVE AT ALL OR EVEN MOVE IN THE OPPOSITE DIRECTION